This is part four of my forensic rant on the the dead REIT walking known as PEI. If you haven't yet read parts one or two or three, they are necessary in order for you to get the full picture. As stated in my last missive on this topic, although BoomBustBlog is a subscription research site, I'm releasing this proprietary blog research for two reasons:

the share price has risen materially since the research was released, primarily due to the fact that so very little has been done to shed light on this company's true financial situation, and

this gives us a prime opportunity to once again demonstrate the thoroughness and rigor of BoomBustBlog forensic analysis.

Blog subscribers can access the full recapitalization document here - PEI Recapitalization Scenario. Those who are casual readers, please see below...

I left off demonstrating how PEI only had a mere handful of properties that were able to take on additional debt (assuming banks were to do a halfway decent job at underwriting), and the additional cash available from leveraging those properties would do very little to assist in digging PEI out of the hole. The incremental loans expected to be availed by the Company is detailed below: USD Million

Property Name

Debt

Cap Rate (%)

Market Value of Property

Incremental loan

New Debt-to-WDV ratio

Exton Square Mall

68.4

6.19%

98.5

30.1

82.4%

Moorestown Mall

55.2

7.67%

66.6

11.4

101.5%

Patrick Henry Mall

91.9

7.71%

98.6

6.7

93.5%

Total

48.3

The Company would be able to get 48.3 mn loan if it goes for refinancing based on recapitalization of its properties - and that's using sky high optimistic assumptions. The Incremental interest due to from the above financing based on the assumption that the lenders would raise the interest on the loans roughly 50 basis-point (bp), roughly US 4.6 mn. The net cash-inflow would be USD 43.8 mn. This is grossly insufficient based on total requirement of around USD 295 mn.

Our analysis was originally performed in the 4th quarter of last year, and since then PEI has raised $100 mln in a preferred offering. A few readers have asked if this alters our scenario, to which I reply - take the optimistic debt refinancing presented above, combined with the $100mln 8% preferred, and an addition $100 mln 8.5% preferred, and you are still observing PEI with a roughly $50mln shortfall and a hell of a heftier debt service to boot. As I said, this is a dead REIT walking!!!

Alternate options

The other options before the Company are as under:

Raise finance against properties which have no specific mortgage against them. However, we looked at the covenants for loan facilities restricting company’s access to these properties for raising finance. Almost all of these properties have been mortgaged under revolving credit facilities.

Raise finance against properties that we have not yet valued as part of the current analysis of valuation of PEI. We valued 27 properties. We looked at other properties to assess probability of raising finance against them.

Out of the remaining 19 properties, 10 properties were acquired between 2003 -2005 and the rest were acquired before 2000. The properties acquired between 2003-2005 are likely to have their valuation fallen in line with the valuation we have witnessed for the properties we valued. As such, probability of raising adequate finance on such properties is also quite minimal. The properties acquired before 2000 already have high debt-to-Net WDV ratio and therefore are likely to have less cushion for further debt.

Schedule of properties not valued

Properties highlighted in blue have been mortgaged under revolving credit facilities

PEI unvalued properties

Looking at the graphic above, it is plain to see that the company has leveraged its portfolio to the hilt, either through property depreciation or outright equity stripping. Those potential cash sources that were unlevered properties have been wrapped up as credit line collateral, while most of the other properties are dramatically underwater - I mean dramatically. What makes this even worse is that these numbers are from management's proclamations and history tells us (as well as BoomBustBlog analysis) that management's views are usually always much more rosy (read bullshitistically unrealistic) thine own hand borne calculations.

Forecasted Financial Statements

Below are PEI’s projected financial statements for 2012 based on the assumption that the shortfall (though unlikely) is met through additional borrowing and as a result the average interest increases to 6.7% annually.... Blog subscribers can access the rest of the full recapitalization document here - PEI Recapitalization Scenario. Click here to subscribe.

I will continue this analysis in several other separate posts - there's a lot more material to cover, nearly all of it drastically negative!!! In the meantime and in between time I'm available to discuss the finer aspects of the analysis in the subscriber retail investor's discussion forum and individual property valuation discussions and higher end questions will be answered in the professional/institutional discussion forums. I will also be available to chat there as well.

The complete REIT analysis referred to in the chart can be found here for subscribers (the property by property valuations are for Professional/Institutional subscribers only):

In continuing my proclamation of truth, my rant in favor of that long lost art of investment valuation known as old fashioned fundamental analysis, I bring to the BoomBustBlog reading public my 3rd installment of PEI - Dead REIT Walking (or, the short candidate from hell). If you haven't yet read parts one and two, they are necessary in order for you to get the full picture. I'm releasing this proprietary blog research for two reasons:

the share price has risen materially since the research was released, primarily due to the fact that so very little has been done to shed light on this company's true financial situation, and

this gives us a prime opportunity to once again demonstrate the thoroughness and rigor of BoomBustBlog forensic analysis.

In Excellent Short Candidate Also Known As Dead REIT Standing! I left off posing the question of PEI breaking covenants. While it hasn't happened yet, methinks it's simply a matter of time. OF course, since the banks involved are engaged in their own incessant can kicking exercises, this may very well be a moot point - at least for now, but more on that later when I not only list the banks that have lent to PEI but show how far underwater their loans are and exactly how, why and where those properties have tanked.

PEI OBservations page 5

There are only three options of PEI:

Scenario I : Refinancing through debt based on recapitalization of properties

Scenario II: Foreclosure of select properties

Scenario III: Firesale of select properties

Of course, there's always the possibility of the company mixing and matching these three scenarios.

Scenario I : Refinancing through debt based on recapitalization of properties

Refinancing requirement for 2012...

PEI has a total shortfall of around USD 295 million which it needs to finance. We have projected its operating results and have looked at available resources (cash balance, unused credit lines, etc). The following table shows the summary of the Company’s finances for 2012.

Amount (USD million) – 2012

Cash at the beginning – Jan 2012

93.94

Cash flows from operations

77.34

Unused credit lines

155.00

Debt due for repayment

621.08

Shortfall

294.80

Under the current scenario, we have assumed that the Company would try to avail itself of an increased loan on its properties, particularly on those which have (relatively) reasonable cap rates and debt-to-market value (LTV) ratios. Consequently, we looked at the company’s portfolio of 27 properties, each of which were valued independently by our team.

The table below shows that while there are quite a few properties with Debt-to-Net WDV (written down value) ratio of less than 100%, those with Debt-to-Market Value ratio are only three in number(where market values is defined as teh value derived by our proprietary analysis based upon market-based inputs and actual cashflows). Put another way, out of 27 properties analyzed, only three of them actually had any value to shareholders from a sale perspective. That's right, 88% of the properties of examined by us were underwater!!! Of the three that weren't underwater, all had reasonably good cap rates (more than 6% in all cases) and would therefore, in our opinion, enable the company to avail itself of incremental loans from its existing lenders on the properties. We (over)optimistically assume that the Company would be able to raise up to 100% of market value on these loans. From a realistic perspective, this is probably unlikely - highly unlikely actually. Remember, we are being optimistic here.

I will continue this analysis in several other separate posts - there's a lot more material to cover, nearly all of it drastically negative!!! In the meantime and in between time I'm available to discuss the finer aspects of the analysis in the subscriber retail investor's discussion forum and individual property valuation discussions and higher end questions will be answered in the professional/institutional discussion forums. I will also be available to chat there as well.

The complete REIT analysis referred to in the chart can be found here for subscribers (the property by property valuations are for Professional/Institutional subscribers only):

Our valuation is based upon the independent analysis of the key properties of the company, which together accounted 78% of the total portfolio in value terms. The actual valuation models are available (on an individual basis) upon request by institutional and pro subscribers.

As a matter of fact, the company has clocked continuous and increasing losses into an ever darkening fundamental and macro outlook. PEI has accomplished a net increase in occupancy due to its strip malls, unfortunately that net occupancy increase comes with a dramatic decrease in revenues - i.e. base rents.

PEI OBservations page 3

From a balance sheet solvency perspective, one of PEI's primary problems is the average cost of its portfolio and points of acquisition. Net-net, the overpaid for many properties during the peak of the bubble. Now that prices are normalizing (facing reality), PEI faces a dramatic portion of its portfolio underwater. Let's take a look at the mall CRE picture during the bubble...

As you can see, Q4 2005 marks the absolute tippy top of the bubble in terms of rents (which drive prices). Now, let's take a look at when PEI acquired the bulk of its portfolio...

PEI OBservations page 4

My subscribers and team actually know precisely what properties are underwater and what properties aren't since we actually valued roughly 78% of the properties by hand using discrete, individual and independently derived inputs. I will be releasing both the summary of that exercise as well as some individual property analysis throughout this week.

Of course, if the company acquired the bulk of its portfolio at the peak of the CRE bubble, and rents have basically trended nearly straight down from that point, one need not wonder which direction cashflows are headed, no? As European banks choke on sovereign debt issues and they face a historically high CRE debt rollover period (now that should be fun), and American banks choking from 360 degree fraud (LIeBORgate, Fraudclosuregate and mortgage putbacks) and litigation contingent liabilities on top of having balance sheets full of the stuff that funded companies's CRE acquisitions such as PEI's in the first place, I really don't see who is going to give PEI the cash to dig itself out of the hole. Of course you can always rely on the foolish equity investors, after all, just look at the share price. It's not as if some smart ass blogger or independent investor is going to snatch the covers off to show these guys naked and completely under-endowed, is it????

Despite all of this, the stock is actually close to its highs!

I'm available to discuss the finer aspects of the analysis in the subscriber retail investor's discussion forum and individual property valuation discussions and higher end questions will be answered in the professional/institutional discussion forums. I will also be available to chat there as well.

The complete REIT analysis referred to in the chart can be found here for subscribers (the property by property valuations are for Professional/Institutional subscribers only):

Our valuation is based upon the independent analysis of the key properties of the company, which together accounted 78% of the total portfolio in value terms. The actual valuation models are available (on an individual basis) upon request by institutional and pro subscribers.

The next installment of the PEI saga (24 hours from now on BoomBustBlog) will go into intricate detail as to the reasons this REIT has close to no way out besides bankruptcy or a foreclosure/fire sale routes. As a precursor to that, we will go over covenant issues, though.

A few weeks ago I commented on my gathering of Armageddon Puts and Truly Busted CRE REITS. Basically, I was looking to capitalize on both the potential mispricing of options and the actual mispricing of certain REIT shares. As recent history unfolds, and as the sell side of Wall Street continuously spews optimistically biased hype, the share prices of the primary REIT that we have targeted has been on a tear. Unfortunately, it has tore in the wrong direction! As a result, I will break rank with tradition here and post proprietary subscription content here that is still quite current and fresh. To put this in other words, I will use proprietary, paid for BoomBustBlog research to show that the emperor hath no clothes!!!

Since the research behind this was a massive undertaking, I will release certain pertinent research on a bit by bit basis. I learned back in 2008 that no matter how insolvent and essentially bankrupt a company may be, it can both kick the can down the road and maintain unrealistically rosy pretenses for a very long time- much longer than a long dated option expiry or the time it takes to add up untowardly expenses in one's margin account used for shorting. That is, unless someone actually takes it upon themselves to do something about the farce - as I did in 2007. Reference the following excerpt from GGP and the type of investigative analysis you will not get from your brokerage house for a story that is eerily similar to the one I am presenting today. In addition, keep in mind that at the time of my initial analysis, GGP was the 2nd largest and one of the fastest growing REITs in the country, was rated investment grade by every rating agency that followed it, and had a buy rating by every brokerage house that followed it:

This missive is more than probably any outside investor in GGP knows about GGP, plus some. The accuracy of the contents below is not guaranteed nor warranteed in any form or fashion. I try my best to be accurate and exact, but things do happen - thus all contents in this post is based upon information and belief. Thus, I invite all to roll your sleeves up, and dig in to do some research for yourselves. This is the type of research that I expect to come from my local brokerage houses. It doesn't happen, thus I must do it myself. Please be aware that I have a bearish position in GGP stock. Read this complete missive, and it will be easy to understand why.

Table of Contents

Short summary of the 3 elements of this report

Background Information on the founding Bucksbaum Family

Background Description of General Growth Properties’ Business

Item 1- Clear evidence that GGP is heading into a refinancing-induced liquidity crunch

I started shorting GGP in the high $60s in 2007 and it filed for bankruptcy (after swearing that my analysis was garbage and had no financial issues it couldn't handle) in 2009 with a share price of roughly $3. The company below is in a very similar pickle, and I simply don't see any way for them to get out of it - that is, other than the hard way! Check after the video break below for the first of several installments of the empirical truth in CRE analysis. These "truths" will include the most rigorous analysis you have every seen of PEI (hundreds of pages) including a property by property independent valuation and cashflow analysis.

PEI Observations page 1

PEI Observations page 2

PEI stock chart

I'm available to discuss the finer aspects of the analysis in the subscriber retail investor's discussion forum and individual property valuation discussions and higher end questions will be answered in the professional/institutional discussion forums. I will also be available to chat there as well.

The complete REIT analysis referred to in the chart can be found here for subscribers (the property by property valuations are for Professional/Institutional subscribers only):

Our valuation is based upon the independent analysis of the key properties of the company, which together accounted 78% of the total portfolio in value terms. The actual valuation models are available (on an individual basis) upon request by institutional and pro subscribers.

The next installment of the PEI saga (24 hours from now on BoomBustBlog) will go into intricate detail as to the reasons this REIT is really BUST!

Here's the secret that BoomBustBlog subscribers know yet seems to be lost on much of the European powers that be: cutting rates and printing will absolutely NOT prevent the nuclear winter in Real Assets. Since loans behind real assets are anywhere between a vast chunk and the majority of bank loans, when this thing goes the European banking system goes with it. This will manifest itself stateside (see sidebox), but the Europeans will get hit harder, at least initially... The reason? Well, it doesn't really matter how low interest rates are - if banks don't lend, borrows will not gain access to capital. Banks are too weak and skittish to lend despite "so-called" record profits, billions in bonuses and compensation, and trillions in bailouts. I repeat, and I repeat again, the only solution is to let the insolvent fail.

The REIT analysis referred to in the chart can be found here forsubscribers (the property by property valuations are for Professional/Institutional subscribers only):

I have just revisited the performance of this company (last update was at least a quarter ago). If my paid subscribers recall, we valued the company at rougly 10% of its current market price (see Cashflows and Debt Preliminary Analysis), with a variety of scenarios to be played out that may affect said valuation. This was based on valuation of key properties of the company, which together accounted 78% of the total portfolio in value terms.

Since then the company has released its full year 2012 results and 1Q2012 quarterly performance. There is no visible improvement in the performance of the company. The company is struggling to handle massive leverage, industry average defying LTVs, proportionately large debt liabilities coming due - the bulk of which is expected to face the music sometime in 2012 in view of upcoming liabilities of over nearly $700 million during the remainder of the year.

So are there any concrete examples of all of this Reggie style pontification? If course there is. Do you see that chart above where the tiny country of the Netherlands is one of the largest per capita contributors to these bailouts? Well, you don't think all of the expenditure (to be) is free do you? Here are some screenshots of a prominent Dutch property company, on its way down the tubes - subscribers reference (clickhere to subscribe):

Fastforward to today, and NIEUWE STEEN INVESTMENTS N.V. - NSI (one of our shortlisted REIT) suffered the most due to revaluation of their Dutch office portfolio. It therefore witnessed 26% decline in last 4 months.

Yesterday, I received a couple of emails along the lines of the one displayed below...

"Hi Reggie,

Can you please put out any guidance on your Armageddon Puts for your lowly retail subscribers?

Thanks"

Well, I would like all to know that I'm not a typical mo-mo type trader. I'm a strategist. With that being said, I'm also not the one to look a strong risk/reward proposition in the face and do nothing. Below is a set of charts that should drive the mindset home.

I have just revisited the performance of this company (last update was at least a quarter ago). If my paid subscribers recall, we valued the company at rougly 10% of its current market price (see Cashflows and Debt Preliminary Analysis), with a variety of scenarios to be played out that may affect said valuation. This was based on valuation of key properties of the company, which together accounted 78% of the total portfolio in value terms.

Since then the company has released its full year 2012 results and 1Q2012 quarterly performance. There is no visible improvement in the performance of the company. The company is struggling to handle massive leverage, industry average defying LTVs, proportionately large debt liabilities coming due - the bulk of which is expected to face the music sometime in 2012 in view of upcoming liabilities of over nearly $700 million during the remainder of the year.

In recent times the company has used revolving credit facilities to fund debt repayments.It looks unlikely it will be able to do so this time around. Below is the depiction of projected cash shortfall in 2012...

Subscribers can download this full update from the next post, to be published within 24 hours...

Seventy-nine percent of the loans packaged into commercial mortgage-backed securities rated by Moody’s that came due in the first quarter weren’t repaid on time, Frankfurt-based analyst Oliver Moldenhauer wrote in a report. The non-payment rate more than doubled from 35 percent in 2009 and reflects “the current weak state of the lending market,” Moldenhauer wrote.

Whoa!!!! And to think everyone is worried about sovereign debt in Europe. Once all of that rapidly depreciated real estate collapses mortgages that have been leveraged 30x, you'll really see the meaning of AUSTERITY! I'm trying to make it very clear to you people, you ain't seen nothing yet!!!

The economic slowdown is hurting landlords of properties from office blocks to car parks and shopping malls across Europe. A total of 38 billion euros ($47 billion) of commercial real estate loans come due this year and next, Moody’s said.

“As banks need to deleverage due to regulatory requirements, commercial real estate financing will remain constrained,” Moldenhauer wrote. “Most loans will not be repaid.”...“Not only can underwater loans not be refinanced, borrowers also face difficulties refinancing moderately leveraged loans that are simply too large in the current lending market,” said Christian Aufsatz, an analyst at Barclays Plc in London. “For CMBS, the situation will become worse.”

Real estate with mortgages that match or exceed the value of the property -- a so-called loan-to-value ratio of 100 percent or higher -- suffered defaults in “nearly all” cases in the first quarter, Moody’s said. About a third of borrowers with LTV ratios of up to 80 percent didn't pay up on time, according to the report.

Keep in mind that the LTV of these properties are safe in the 50-60 LTV range. We're now discussing 80 to 100+ LTVs. Think about it? Whose going to cough up the missing equity? Quick answer - bank equity investors! More thought out answer - Taxpayers the world over as their hardheaded ass government officials rush in once against to try to bailout banking systems that are too big to be bailed out, leaving what few decent sovereign nation economies left insolvent - once again!!!!

Most of the loans that were repaid were for less than 25 million euros, while just one of the 15 mortgages worth 75 million euros or more was paid on time, Moldenhauer wrote.

So, what is the net effect on real estate as thousands of underwater mortgages come up for rollover on depreciating real property?

Slide21

image035

image036

image038

So are there any concrete examples of all of this Reggie style pontification? If course there is. Do you see that chart above where the tiny country of the Netherlands is one of the largest per capita contributors to these bailouts? Well, you don't think all of the expenditure (to be) is free do you? Here are some screenshots of a prominent Dutch property company, on its way down the tubes - subscribers reference (click here to subscribe):

My next posts on this topic will delve into US REITS, global (but EU based) insurers and banks who have the exposure to make ideal shorts considering "The astonishing number this time is the number of banks participating, which signals that a lot more small banks looked for the money and it is likely they will pass it on to the economy,” said Laurent Fransolet, head of fixed income strategy Barclays Capital in London, who estimates about 300 billion euros of the total is new lending. “So the impact may be bigger than with the first one.”

Stay tuned!

My next post on CRE will show how this is not just a European phenomena. Yes, US REITS will come crashing back to reality as well. Subscribers should pay attention as I ladder puts and shorts into this REIT which we have calculated to fall roughtly 95% in value if math comes to the forefront. To date, the price has not broken out of a relatively narrow range, which means the opportunity is still there. I am considering making the research public after it is clear all long terms subscribers have attained positions.

I will go over this opportunity in more detail over the next 72 hours as well as reviewing the path taken by European real estate to show what can be expected here in the US and the FIRE sector.

Please note that we independently value REIT portfolios - property by property - with independently sourced rents and expenses to ascertain a truly accurate valuation picture. This is how we called the short on General Growith Properties in 2007, a year before they were downgraded from investment grade status and still buys on them from all the major sell side houses that followed them. I rode GGP down from the $60s to about $8, the shares eventually fell to $1 and change or so. The General Growth Properties short generated returns deep into the three digits... Deep enough to come close to registering a four digit return.

The number of workers receiving SSDI jumped 22 percent to 8.7 million in April from 7.1 million in December 2007, Social Security data show. That helps explain as much as one quarter of the decline in the U.S. labor-force participation rate during the period, according to economists at JPMorgan Chase & Co. and Morgan Stanley.

Expiring Benefits

The participation rate -- the share of working-age people holding a job or seeking one -- was 63.8 percent in March after falling to a three-decade low of 63.7 percent in January. Disability recipients may account for as much as 0.5 percentage point of the more than 2 point drop since the end of 2007, the economists calculate, and that contribution couldgrow when some extended unemployment benefits expire at the end of this year.

“How we measure and understand what’s going on in the economy can be influenced by the degree to which various public- support programs are available and being used,” said Michael Feroli, chief U.S. economist at JPMorgan in New York. “With a rising number of disability beneficiaries, there are both lower unemployment rates and lower participation rates.”

The productivity of U.S. workers fell in the first quarter, indicating businesses are reaching the limit of how much efficiency they can wring from the workforce.

The measure of employee output per hour declined at a 0.5 percent annual rate after a 1.2 percent gain in the prior three months, figures from the Labor Department showed today in Washington. Expenses per worker increased at a 2 percent rate, less than estimated.

Employers had to take on more staff at the start of the year even as growth slowed, signaling they can no longer count on existing staff to meet demand. A government report tomorrow may show payrolls increased again in April, according to the median forecast of economists surveyed by Bloomberg News.

Okay, so growth slowed after 4 years of the deepest, widest, most global fiscal stimulation exercise in the history of... well... The globe! One would assume this slowing growth trend will accelerate as the stimulus is unwound due to a variety of common sense reasons, starting with...

Even if stimulus is not lessened, we still can't ignore the plain and simple fact - it ain't working. Growth has slowed any way and quite a few developed nations who shepherded the global stimular cartel are now stating they're back in recession - depsite the fact that I made clear to my subscribers that they never left recession in the first place. Now, as growth continues to slow, what exactly does the astute pontificator think will happen to employment demand???????????????????????????????? Well, it's a positive omen as long as you only live your life a fiscal quarter at a time. Just don't look past 2 or 3 months or so, and you're straight, right????????????????

“This slowdown in productivity is a positive omen for the labor market,” Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc. in New York, said in a research note. He correctly projected the drop in productivity. “It suggests that additional increases in output will necessitate a faster pace of hiring than what has occurred thus far.”

A regular commentator on BoomBustBlog has been attempting to make the case for a housing recovery based upon rising employment metrics. He has, particularly, pointed out rising hourly earnings. I thought I would take this time to point out that average hourly earnings can rise due to the fact that less people are working. The aggregate employment in the US has literally fell off of a cliff. Since you know that I love pictures, let's do this graphically...

Below you have a chart of total hours worked in the US with the average hourly earnings superimposed on top. As you can see, two and a half years and trillions of dollars of stimulus and QE later, we have barely budged. There was no multiplier effect. In essence, what you had was a divisor effect, and the money would have shown up more on a dollar for dollar basis if it was simply given to the populace! Of course, that wouldn't have kicked the inevitably deflation of the banking system down the road, now would it have?

Now that I have (quite honestly) issued my most sincerest thanks, let's attempt to remedy the shortcoming of the limited amounted of time that I had. You see, after the 3 minute hit ended there was a brief discussion of commercial real estate in which I didn't get to participate, thus I will take the liberty of doing so through this medium.

Yes, commercial real estate has shown some marginal increases in the last quarter, and REITs have been on fire. The issue is, many publicly traded equities have detached from their underlying fundamentals. Let's reference “A Granular Look Into a $6 Billion REIT: Is This the Next GGP?” The following are excerpts from it:

We have conducted analysis on all MBS sale and purchase transactions conducted by the Fed whose data was recently released. Of the total 10,058 MBS transactions, 72% were done at a yield of less than 5% (5% below yield of 4.0%, 32% between 4.0%-4.5%, 35% between 4.5-5.0%) with an average yield of 4.75% on all MBS transaction. The table below presents the number of transactions under their respective yield category.

We have also analyzed the yield on MBS purchased and MBS sold, looking for price discrepancies between MBS purchased and MBS sold. The data points out that the average yield on MBS purchased was 4.71%, 29bps lower than average yield for MBS sold, thus implying MBS purchased were at a higher price than MBS sold. You know that old government adage, buy high and sell low!

The Fed, Barney Frank, et. al., and the Treasury colluded to lift the prices of equities, real assets. government bonds, and the derivatives based upon them to considerably above their fundamental values in an attempt to reflate the bubble and pull the country out of recession the “stanky” way.

Goldman Sachs has revealed details of about $5bn in investment losses suffered during the crisis for the first time this week, in a move that will deepen the debate over companies’ financial disclosures. The figures, issued as part of internal reforms aimed at silencing Goldman’s critics, show that the bank suffered $13.5bn in losses from “investing and lending” with its own funds in 2008. But Goldman’s regulatory filings and its executives’ comments to investors at the time pointed to about $8.5bn of losses arising from its investments in debt and equity, as markets were rocked by the turmoil.

How many institutional and/or retail investors will be able to ferret out such? Or more importantly, why should they have to? It is the reporting company’s responsibility to report, not to obfuscate. The big problem with this “hide the market marks” thing is that markets tend to revert to mean.Unless said market values fundamentally catch up with said market prices, you will get a snapback. That is what is happening in residential real estate now. That is what happened in Japan over the last 21 years!!! That’s right, it wasn’t a lost decade in Japan, it was a lost 2.1 decades!

This has been the first balance sheet recession that the US has ever had, but there is precedence to follow. Japan had a balance sheet recession following their gigantic real asset bust. They made a slew of fiscal and policy errors, which essentially prolonged their real asset recession (now officially a depression) for T-W-E-N-T-Y O-N-E long years! For those that may have a problem reading that, it is 21 long years. What did the Japanese do wrong?

The petrodollar rich nation of Abu Dhabi, outside of having an extremely rich and Arabic culture, is in the possession of the unique opportunity to capitalize on the plight of the EU and affected nations of the coming Eurocalypse. Fresh back from my fact finding trip through the UAE, I noticed the MSM had the headline Abu Dhabi Royals Involved in RBS Talks. In short, RBS, the 83% British taxpayer owned debacle of a bank is again in search of capital, but this time shrouded in the haze of the government selling off a portion of its stake at a significant loss.

RBS was heavily levered in rapidly depreciating toxic assets as a result of its ABN Amro purchase, and its executives obviously failed to subscribe to BoomBustBlog, for they took a royal (pun fully intended) Greek bathing on their Greek bond investments. Remember, I warned of an explicit Greek default two years ago and like simple arithmetic dictated, defaults came:

That being said, cash rich nations such as the UAE see gold in them thar hills. Personally, I doubt if the hills are made of gold, but there is definitely some gold buried within, even if it is at $1,700 per ounce. I would instruct my clients to go on an asset buying binge from the banks, developers and asset management funds versus attempting to buy the funds directly, or better yet use structured assets to gain exposure to said troubled assets. Many banks, like RBS, will get hit more than once from borrowers such as Greece. As queried many times on this blog, "What do you think, pray tell, happens when the liquidity starved, capital deprived, over leveraged banks fail to roll over all of that underwater EU mortgage debt?"

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Investors seeking safety in Germany, the UK and France may truly be in for a rude awakening!

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Reggie Middleton Featured in Property EU, one of Europe's leading real estate publications

And though all of these countries have felt the heat from the markets, Greece has become almost synonymous with the deep crisis at the heart of the euro zone, which has hollowed out its appeal to investors.

"It is not clear Greece has the luxury of doing anything in an optimal way; they are basically burning the furniture just to get by," Bill Megginson, Professor of Finance at the University of Oklahoma, told Reuters.

"But other countries, especially where the crisis seems to have abated a bit, like Italy and Spain, they could and they probably will." Greece came up with plans for asset sales to convince its lenders it was serious about reforming its uncompetitive economy and also to raise funds to pay down its debt mountain.

But the EU and IMF, which pushed Greece for bolder and more detailed plans as to how it would deliver on its promises, have become increasingly frustrated with the country's repeated failure to meet targets.

Despite a reluctance to sell assets in such poor market conditions, Greece - which aims to raise 19 billion euros ($25 billion) from privatizations by 2015 - has begun ramping up its efforts, including inviting bids for state-owned natural gas company DEPA and the management rights to its Olympic broadcasting complex.

It plans to put stakes in betting monopoly OPAP and refiner Hellenic Petroleumup for sale by May, Greece's chief privatization official said.

But its tight timeframe and ambitious targets, already scaled back from 50 billion euros, suggest it will struggle to meet its price expectations.

Funded by like minded strategic capital sources, there are a plethora of delicious assets for the picking across the EU and UK. Now may be a tad bit premature to jump, but it is a good time to start priming the pump. All who are interested in ideas such as these should feel free to contact me.

Euro-area banks tapped the European Central Bank for a record amount of three-year cash in an operation that may boost bond and equity markets.

The Frankfurt-based ECB said today it will lend 800 financial institutions 529.5 billion euros ($712.2 billion) for 1,092 days. Economists predicted an allotment of 470 billion euros, according to the median of 28 estimates in a Bloomberg News survey. In the ECB’s first three-year operation in December, 523 banks borrowed 489 billion euros.

So, basically, nearly twice as many banks are in trouble now as compared to just three months ago. This is bullish, right???!!!

“The astonishing number this time is the number of banks participating, which signals that a lot more small banks looked for the money and it is likely they will pass it on to the economy,” said Laurent Fransolet, head of fixed income strategy Barclays Capital in London, who estimates about 300 billion euros of the total is new lending. “So the impact may be bigger than with the first one.”

I'm not familiar with the quality and/or strength of the shit they smoke over there in London, but from the looks of things it appears to be potent enough. Let's take this bloke's comment to heart, "it is likely they will pass it on to the economy,” . Okay, now where do I begin? Exactly how much of first LTRO made it into the actual economy versus being hoarded by the banks?

... If you didn't have a job, you wouldn't be able to pay back your loans. Then again, one way to solve this problem is simply not to give anybody a loan, eh?

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Alas, we don't have to worry about that since the money spigots are just so turned on to the Greek corporate sector you don't have to worry about a scarcity of jobs. With all of that capital sloshing around the system, Grecian companies are bound to start going on a hiring binge ANY MINUTE NOW!

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Now, look very carefully at the last two charts, take a big toke, and re-read what that Barclays Bloke had the nerve to speak in a major business rag...

...it is likely they will pass it on to the economy,” said Laurent Fransolet, head of fixed income strategy Barclays Capital in London, who estimates about 300 billion euros of the total is new lending. “So the impact may be bigger than with the first one.”

Damn.... Okay, maybe we are taking this guy out of context. After all, he also said, "The astonishing number this time is the number of banks participating, which signals that a lot more small banks looked for the money". Hmmm, let's take a look at some of the smaller banks, wait a minute... Aren't the Greek banks relatively small???

Then there's the issue of the run on the banks. With all that is going on, I made very clear that multiple runs are imminent, hence the need for 100 bp, junk collateral funding from the ECB. The Barclay's bloke says differently in that the money will not go to cushion runs, but will go to the greater [sic real] economy. Yeah... Pass the blunt! As excerpted from the following reports...

The problem then is the same as the European problem now, leveraging up to buy assets that have dropped precipitously in value and then lying about it until you cannot lie anymore. You see, the lies work on everybody but your counterparties - who actually want to see cash!

Overnight and on demand funding is at a 72% deficit to liquid assets that can be used to fund said liabilities. This means anything or anyone who can spook these funding sources can literally collapse this bank overnight. In the case of Bear Stearns, it was over the weekend.

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Book Value, Schmook Value – How Marking to Market Will Break the Bear’s Back

Okay, I’ll admit it. I watch CNBC. Now that I am out of the confessional, I can say that when I do watch it I hear a lot of perma-bulls stating that this and that stock is cheap because it is trading at or below its book value. They then go on to quote the historical significance of this event, yada, yada, yada. This is then picked up by a bunch of other individual investors, media pundits and other “professionals,” and it appears that rampant buying ensues. I don’t know how much of it is momentum trading versus actual investors really believing they are buying on the fundamentals, but the buying pressure is certainly there. They then lose their money as the stock they thought was cheap, actually gets a lot cheaper, bringing their investment down the crapper with it. What happened in this scenario? These investors bought accounting numbers instead of true economic book value. Anything outside of simple widget manufacturers are bound to have some twists and turns to ascertain actual book value, actual marketable book value that is. This is what the investor is interested in, the ECONOMIC market value of book, not what the accounting ledger says. After all, you are paying economic dollars to buy this book value in the market, so you want to be able to ascertain marketable book value, I hope it sounds simplistic, because the premise behind it is quite simple – How much is this stuff really worth?. The implementation may be a different matter, though. I set out to ascertain the true book value of Bear Stearns, and the following is the path that I took...

I urge all to review that post of January 2008 and realize that negative equity is negative equity, and no matter how you want to label it, account for it, or delay and pray, broke is broke! This lesson should not be lost on the Europeans, but unfortunately, it is!

According to just released data from the Bank of Greece, January saw Greeks doing what they do best (in addition to striking of course): pulling their money from local banks, after a near record €5.3 billion, or the third highest on record, was withdrawn from the local banking system. As a result, total bank cash has now dropped to just €169 billion, down from €174 billion in December, and the lowest since 2006. This is an 18% decline from a year ago, or €37 billion less than the €206 billion last January, and is a whopping 30% lower than the all time deposit highs from 2007, as nearly €70 billion in cash has quietly either left the country or been parked deep in the local mattress bank.

So, what is the net effect on real estate as thousands of underwater mortgages come up for rollover on depreciating real property?

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So are there any concrete examples of all of this Reggie style pontification? If course there is. Do you see that chart above where the tiny country of the Netherlands is one of the largest per capita contributors to these bailouts? Well, you don't think all of the expenditure (to be) is free do you? Here are some screenshots of a prominent Dutch property company, on its way down the tubes - subscribers reference (click here to subscribe):

My next posts on this topic will delve into US REITS, global (but EU based) insurers and banks who have the exposure to make ideal shorts considering "The astonishing number this time is the number of banks participating, which signals that a lot more small banks looked for the money and it is likely they will pass it on to the economy,” said Laurent Fransolet, head of fixed income strategy Barclays Capital in London, who estimates about 300 billion euros of the total is new lending. “So the impact may be bigger than with the first one.”